Albany International Corp. (NYSE: AIN) operates two distinct business segments: (1) Machine Clothing (MC), which manufactures custom fabrics and belts for the paper & packaging industries; and (2) Albany Engineered Composites (AEC), which produces composite parts for the aerospace & defense sector.

Following the divestiture in 2012 of two non-core assets, Albany Doors and PrimaLoft, AIN currently operates two largely unrelated businesses: the first, Machine Clothing, is a slow-growth but reliable cash flow generator, while the other, Engineered Composites, is a high-growth business potentially on the cusp of a dramatic improvement in its earnings power, which we do not think is adequately reflected in the current share price (and could in itself provide upside optionality for the shares).

The businesses have minimal synergies and vastly divergent end-market exposure as well as differing growth, margin, and capital-intensity profiles. Thus, in our view, a separation of the businesses could improve management’s focus and execution to the benefit of long-term operating performance, unlocking incremental value beyond any potential re-rating of the Engineered Composites segment. As well, we note that in the event of a split, MC’s robust cash generation profile could support a debt load adequate to provide AEC with the funding necessary to complete its planned facility investments.

Considering management’s financial commentary, peer and M&A valuations, and discounted cash flows, value of $45 per share and $23 per share can be assigned to AIN’s Machine Clothing and Engineered Composites businesses, respectively. Accounting for corporate costs and projected net debt of ~$17 per share yields a base-case sum-of-the-parts value of roughly $51 per share. Notably, our bull case scenario suggests upside to $59 per share, while a more bearish case implies a valuation of $44 per share (with solid downside protection at ~$35).

On July 24, 2015, Johnson Controls, Inc. (NYSE: JCI) announced a plan to pursue a tax-free spin-off of its Automotive Experience business. The transaction is expected to close by October 31, 2016. Bruce McDonald, Johnson Controls’ vice chairman and executive vice president, will serve as the chairman and CEO of the new company. Beda Bolzenius will serve as president and chief operating officer. As part of its preparation for the spin-off, Johnson Controls is initiating a comprehensive cost savings program.

JCI is a global diversified technology and industrial company, focused on products that optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and seating and interior systems for automobiles. The company has been working on a strategic realignment of its businesses for some time. This announcement follows JCI’s announcement in June of 2015 that the company was exploring strategic alternatives for the Automotive Experience business. A spin-off of this business would appear to unlock value as JCI re-rates into a faster-growing, higher-margin multi-industrial company. The separation would allow for further strategic expansion of JCI’s two other operating segments: Building Efficiency (HVAC) and Power Solutions.

The Automotive Experience segment, to be spun out as Adient Ltd., is one of the world’s largest automotive suppliers, providing seating and interior systems through its design and engineering expertise. The business’s technologies extend into virtually every area of an automobile’s interior, including seating, door systems, floor consoles, instrument panels, and cockpits, and its customers include most of the world’s major automakers. The business reported $20.1 billion in revenue in F2015 (ending September), or 54% of JCI’s consolidated revenue of $37.2 billion, and reported $1.2 billion in EBITDA, 32% of JCI’s consolidated EBITDA of $3.7 billion. Adient is expected to benefit from strong existing relationships with customers and well-established positions in growth markets including China, while generating strong cash flow.

In recent years, JCI has been working to reduce its reliance on the auto parts industry, which has lower margins than the other segments. The automotive business (Adient) generated more than half of Johnson Controls’ 2015 sales but only approximately 36% of its profit. By contrast, the building controls unit accounted for 28% of sales and 35% of profit.

With the spin-off of Adient, the Building Efficiency and Power Solutions businesses render JCI a less cyclical story. Following the upcoming merger with Tyco International plc (NYSE: TYC), which is expected to close by October 1, 2016, Johnson Controls will leverage a formidable automotive battery business serving both automakers and the aftermarket. The business accounted for 18% of F2015 revenue. In addition, the spin-off provides post-spin JCI with incremental cash to further expand its remaining HVAC and Power Solutions businesses through acquisitions of adjacent companies.

JCI’s valuation has historically lagged industrial conglomerate peers, due to lower profitability and return on equity (ROE) relative to peers (10% versus a peer average of 37.9%). However, the separation of the automotive seating and interiors businesses brings the company closer to its goal of becoming a multi-industry company as opposed to its previous image as an “auto parts supplier.” With the spin-off, JCI becomes a leading automotive battery and building controls manufacturer, and in turn, a less cyclical investment story. In addition, following completion of the Tyco merger, the company will include a leading fire and safety business. Finally, as a leaner company, JCI is more likely, in our view, to pursue mergers and acquisitions in order to achieve incremental growth. While the majority of JCI’s recent strategic moves have been divestments, it is reasonable to expect the post-spin company to shift toward merger and acquisition activity, which could lend incremental support to the valuation over time.

Based on an analysis of peer multiples of estimated revenue, EBIT, assets, and dividend yield, pre-spin JCI can be fairly valued at $51 per share, consisting of $38 per share for JCI, $7 per share for Adient, and approximately $6 per share in cash to be paid to JCI shareholders in connection with the TYC merger. Post-spin (and TYC merger), shares of JCI and Adient can be fairly valued at $26 and $49, respectively, based on a 1:10 distribution ratio. With the pre-spin fair value estimate implying 14% upside to JCI’s current share price ($44.75 as of this writing), pre-spin JCI shares are recommended for purchase. While organic top line growth may be constrained in the near term, recent operational improvements have been encouraging. The spin- off also positions JCI for additional mergers and acquisitions which could further consolidate market share and expand its customer base. The merger with Tyco and associated operational and synergies may also act as catalysts for the shares.

Lifestyle International Holdings Limited (Ticker: 1212 HK) is a Hong Kong-based retailer that operates mid- to upper-end department stores. On April 22nd, Lifestyle International disclosed that it had submitted an application to the Hong Kong Stock Exchange with regard to its February 15th, 2016 proposal to spin off of its China operations. The spin-off began trading in early July and has declined meaningfully in its first few weeks of operation. After initially trading up to HKD 2.70, it has since declined to HKD 1.68. The spin-off was on a one-for-one basis, such that each holder of Lifestyle International shares received an equal number of Lifestyle China shares and, thus, both companies have approximately 1.60 billion shares outstanding.

The spin-off, named Lifestyle China Group, comprises the company’s three department stores located in China as well as an equity interest in the Beiren Group, a state-controlled retailer. Despite a challenging economic environment, the company’s China sales increased by 1.9 percent in 2015, which includes substantial declines at the recently closed Shenyang store, as well as a more than a 20 percent decline in the Dalian store. EBITDA for Lifestyle China, excluding equity income from Beiren, was HKD 357 million in 2015 – 11% below the 2014 level for the above-mentioned reasons. However, including equity income from its associates, EBITDA increased by 1 percent, to HKD 757 million. Adjusting this figure for non-controlling interests and one-time items results in approximately HKD 690 million. A group of Chinese department store operators trade at a median enterprise value-to-EBITDA multiple of 8.6x, so if Lifestyle China were valued at a similar multiple, it would have an enterprise value of approximately HKD 6.0 billion . This equates a share price of HKD 3.00, or almost double the recent level. Currently, at a market capitalization of just HKD 2.7 billion, it trades at just around 6x 2015 adjusted EBITDA, but more importantly, based only on its share of the net income generated by its Beiren investment, Lifestyle China is trading at just 12x this earnings stream, which has been growing in recent years. Lifestyle International, on the other hand, currently trades at HKD 11.08, or 8x its trailing EBITDA, as compared to a pre-spinoff stock price of approximately HKD 13.00 on July 4th. Thus, it is trading just about HKD 2.00 lower, a balance that is made up by the (at least initially) approximately HKD 2.00 trading price of Lifestyle China. Thus, based on comparative valuations as well as relative attractiveness of the parent and the spin off, Lifestyle China’s current valuation appears to be considerably more attractive.

On January 26, 2016, Lockheed Martin Corporation (NYSE: LMT) announced its plans to spin off its Information Systems and Global Solutions business (IS&GS), which will then merge with Leidos Holdings, Inc. (NYSE: LDOS) in a Reverse Morris Trust (RMT) transaction. LDOS will pay LMT shareholders $1.8 billion in cash and $3.85 billion in newly issued stock (based on the current LDOS price of $50.00 per share), or approximately 10x 2016E EBITDA. LMT shareholders will own 50.5% of the merged entity, with LDOS shareholders owning the remaining 49.5%. Based on market conditions prior to the closing of the merger, Lockheed Martin will determine whether the shares will be distributed to shareholders in a spin-off, a split-off, or a combined spin-off and split-off transaction (the final transaction structure has not been determined as of this writing). In a spin-off, all Lockheed Martin stockholders would receive a pro rata number of shares. In a split-off, Lockheed Martin would offer its stockholders the option to exchange their shares of Lockheed Martin common stock for shares of Splitco common stock, which shares would be converted immediately into shares of Leidos common stock in the merger, resulting in a reduction in Lockheed Martin’s outstanding shares.

Immediately prior to the distribution of IS&GS, LDOS will issue an approximately $1.8 billion special cash payment to Lockheed Martin ($13.50/share), which will be used by Lockheed Martin after the close of the transaction to retire debt, pay dividends, or repurchase its shares. Leidos will also pay a special dividend to its shareholders of $13.64 per share, contingent on closing of the transaction. The special dividend to Leidos shareholders is expected to be funded through new borrowing by Leidos and cash on hand. The transaction, which is expected to close in the second half of 2016, is subject to the customary closing conditions, including regulatory and Leidos shareholder approvals and receipt of opinions of tax counsel. The businesses will continue to operate separately until the transaction closes.

The spin-off of Lockheed’s IT services business and its combination with Leidos builds on the ongoing consolidation in both the commercial and government IT services industries. Companies are increasingly moving toward the separation of commercial- from government-focused assets, as the former have historically traded at almost 15% premiums to the latter (valuations have expanded since October 2015, owing largely to the expectation among market observers of potential mergers and acquisitions). Most recently, Computer Sciences Corporation (NYSE: CSC) spun off its government services business, CSRA Inc. (NYSE: CSRA), which subsequently merged with privately held SRA International in November 2015 (for more details, please refer to The Spin-Off Report dated October 29, 2015).

For LMT, the largest U.S. government information technology provider, the transaction should enhance the company’s business focus as a global aerospace and defense contractor, as the IT services and the aerospace and defense end-markets are significantly different, with little leverage in the combination of the two in a single entity. Moreover, by spinning off IS&GS, LMT divests an entity in an increasingly competitive, lower-margin business and eases the debt load resulting from its $9 billion acquisition of Sikorsky Aircraft from United Technologies Corp. (NYSE: UTX) in late 2015. LMT has been considering multiple strategic options for this business since then.

For Leidos, the combination with IS&GS is consistent with the company’s strategy of refocusing its business on national security, health, and engineering, and investing in growth. IS&GS brings considerable incremental scale, with approximately $5 billion in revenue. The acquisition adds experience in large, complex IT system implementation and operation, and brings additional federal and international IT solutions and services work to the Leidos portfolio, providing more avenues to sell value-added services such as cybersecurity and analytics. As background, following its spin-off from Science Applications International Corp. (NYSE: SAIC) in 2013, Leidos bore much of the cost of the transaction and struggled with its engineering and commercial healthcare businesses. In late 2015 there was widespread discussion among industry observers of the possibility that Leidos was considering acquiring BAE Systems’ government services assets. Leidos, in addition to CACI International, Inc. (NYSE: CACI), was considered by investors to be the most logical acquirer of LMT’s IS&GS business. However, CACI’s acquisition of the government business of L-3 Communications (NYSE: LLL) for $550 million (completed February 2016) likely called into question the necessity for CACI to seek incremental scale.

Based on an analysis of projected revenue growth, EBITDA, EPS, and assets, as well as comparable valuations, pre-spin LMT can be fairly valued at $248 per share. With the implied fair value estimate approximating LMT’s current share price ($256 as of this writing), the shares appear fully valued for the transaction. Post-spin, LMT shares can be fairly valued at $236. For post-merger LDOS, factoring in the $13.64 per share special dividend, the shares can be fairly valued at $60. The fair value estimate represents 20% potential upside to the current LDOS share price ($50 as of this writing), implying the transaction should unlock incremental value. As such, shares of LDOS are recommended for purchase prior to the transaction. Note that our fair value estimates are subject to change upon determination of the final transaction structure.

TriMas Corp. (NASDAQ: TRS) is a mini-industrial conglomerate reporting four distinct operating segments: (1) Packaging (39% of sales and 57.5% of EBITDA in 2015); (2) Aerospace (20% of revenue and 25.5% of EBITDA); (3) Energy (22% of the top line and 2% of EBITDA); and (4) Engineered Components (19% of sales and 15% of EBITDA in 2015).

TRS has an active history on both the acquisition and divestiture fronts. Most recently, following the spin-off of its automotive business, Cequent (renamed Horizon Global), in June 2015, we discern that TRS’s core operating focus is on its Packaging and Aerospace segments, which have comparatively higher growth and margin profiles; thus, the divestiture, via spin-off or sale, of its less-core Energy and Engineering Components businesses could serve to reduce leverage and/or provide incremental growth capital for core businesses as well improve overall profitability and bolster TRS’s ability to sustainably generate returns in excess of its cost of capital, which we think is key to generating long-term shareholder value. As well, a separation would reduce the company’s exposure to energy-related volatility/cyclicality and potentially improve the stock’s valuation, which at 8.3x 2017E EBITDA represents a discount to all relevant peer averages and, in our view, undervalues the company’s high-margin core businesses.

In February 2016, TRS reached an agreement with Engaged Capital, a sometime-activist investor with a ~1.5% passive stake in the company, appointing Herbert Parker to the Board. The Board now consists of nine directors, of which eight are deemed independent. In addition, the agreement included a provision whereby Glen Welling, Engaged’s CIO, could be appointed to the Board at the investor’s request through 2017.

Considering management’s financial commentary, peer valuations, and DCF analysis, value of $24 per share and $10 per share can be assigned to TRS’s Packaging and Aerospace businesses, respectively, while Energy and Engineered Components can be collectively valued at $6 per share. Accounting for corporate costs and projected net debt of ~$14 per share yields a sum-of-the-parts value of roughly $26 per share.

Qinqin Foodstuffs is a food and snacks company manufacturing and distributing jelly, crackers, chips, seasoning, bakery and confectionary products. It is one of the leading producers of jelly products; the division is responsible for 60% of its revenue and operating income.

However, both its sales—RMB 1,020 million in 2015—and its operating income—RMB 76 million last year—are on a downward spiral. In particular, jelly sales have declined primarily due to two incidents of toxic gelatin use by competitors. Furthermore, all segments saw a sharp deterioration in sales and profitability during 2015—suffering from a slowdown of the Chinese economy as well as a move towards the consumption of more well-known, foreign brands.

Based on peer enterprise value-to-EBITDA and price-to-earnings multiples, Qinqin’s equity is valued between HK$5.7 and HK$8.9 per share.

Following the completion of the Qinqin spin-off, Hengan International will be a pure-play producer of hygiene products, primarily sanitary napkins, tissue paper and disposable diapers. Such products can be even more stable than the spin entity’s food and snacks portfolio due to their importance.

Sales of disposable diapers and tissue paper declined in 2015. While these products are in high demand by China’s increasing middle class, competition from foreign companies is intense. Domestic products, particularly diapers, are considered of low quality, and those Chinese consumers who can afford to opt for foreign brands.

Despite having HK$ 17.1 billion in debt, Hengan also has HK$ 18.5 in cash on its balance sheet, for a net cash position of HK$1.4 billion. Based on the enterprise value-to-EBITDA and price-to-earnings multiples of Western peers, Hengan’s shares following the spin-off are valued between HK$76 and HK$78.

Fiesta Restaurant Group Inc. (NASDAQ: FRGI) operates two distinct restaurant chains: (1) Pollo Tropical (53% of sales and 60% of EBITDA in 2015); and (2) Taco Cabana (47% of revenue and 40% of EBITDA).
 

FRGI’s Pollo Tropical (PT) and Taco Cabana (TC) restaurant chains have differentiated brands with unique offerings, geographic footprints, and long-term expansion opportunities, resulting in, among other things, divergent growth strategies and capital requirements. Thus, a separation of the brands could improve management focus as well as execution, to the benefit of long-term operating performance in terms of margins, growth, and capital allocation, in addition to any potential re-rating of the higher-growth/higher-margin Pollo Tropical brand (compared to the more mature, cash-flow-generating Taco Cabana brand). For its part, FRGI currently trades at less than 6x 2017E EBITDA, which compares with a fast-casual peer group trading, ex-outliers, at around 9x (albeit in a wide range of 5.5x-12x).
 

In early 2016, FRGI indicated it would begin to take steps to develop the internal infrastructure, in terms of management and systems, to prepare for a potential separation of its PT and TC brands in 2017-2018. Given the low-tax basis of TC, a spin-off transaction is the preferred vehicle (versus a sale) for a split. Anecdotally, management expects a separation would eliminate internal competition for resources as well as improve management focus and execution without any material marketing or supply-chain dis-synergies. Nevertheless, the shares are down 35% year to date (vs. a 1% gain for the S&P 500).
 

Considering management’s financial commentary as well as peer and M&A valuations, value of $28 per share and $9 per share can be assigned to FRGI’s Pollo Tropical and Taco Cabana businesses. Accounting for projected net debt of ~$4 per share yields a base-case sum-of-the-parts value of roughly $33 per share.

On December 4, 2014, Hawaiian Electric Industries, Inc. (NYSE: HE) announced a plan to spin off its wholly owned subsidiary American Savings Bank via a tax-free distribution to shareholders. The spin entity will be named ASB Hawaii, Inc. (ASB) and is expected to trade on the NYSE under the ticker “ASBH”. The spin-off is contingent on the acquisition of Hawaiian Electric (HEI) by NextEra Energy, Inc. (NYSE: NEE) in a transaction valued at approximately $4.7 billion, including assumed debt of $1.7 billion. Hawaiian Electric Industries shareholders as of the record date (to be determined) will receive 0.2413 NextEra Energy shares per Hawaiian Electric Industries share and a one-time special cash dividend payment of $0.50 per share. Management estimates that total value to HEI shareholders, excluding assumed debt and including the one-time special cash dividend, and based on an estimated value of American Savings Bank of approximately $8.00 per share, is $3.5 billion, or approximately $33.50 per HEI share. The transaction is subject to approvals from the Hawaii Public Utilities Commission (PUC), Federal Energy Regulatory Commission (FERC), federal banking regulators, the SEC, HEI shareholders, and Hart-Scott-Rodino antitrust provisions, and is expected to close within the next few months, pending PUC approval, which remains outstanding as of this writing.

NextEra, based in Juno Beach, Florida, is one of the largest rate-regulated electric utilities in the U.S. The company has multiple subsidiaries, including Florida Power & Light (FPL), one of the largest electric utilities in the U.S., and NextEra Energy Resources, LLC, North America’s largest producer of renewable energy from the wind and sun. NextEra owns and operates about 17% of installed U.S. wind capacity, about 14% of installed U.S. utility-scale solar, and eight nuclear reactors. The company generated 2015 revenue of $17.5 billion and approximately 45,900 megawatts of generating capacity, and has approximately 13,900 employees in the U.S. and Canada. NextEra has recently been divesting assets in order to pursue a growth strategy through accretive acquisitions while improving shareholder returns, having expanded its dividend by 10% annually since 2011. In July 2015, the company completed a successful initial public offering of its wind and solar subsidiary NextEra Energy Partners LP (NYSE: NEP), raising $406.2 million. In September, NextEra withdrew an offer to acquire Oncor, the Texas electricity transmission division of bankrupt Energy Future Holdings Corp., which would have expanded its already well-established Texas operations. Hawaiian Electric is expected to be neutral to NextEra EPS within the first 12 months following completion of the transaction and accretive thereafter. The transaction is expected to have no impact on NextEra Energy’s quarterly dividend policy.

Hawaiian Electric is the state’s largest power supplier, serving approximately 450,000 customers, or 95% of the population of Hawaii, Oahu, and Maui. The company is heavily regulated and vulnerable to the state’s energy policy changes, having been increasingly pressured to adapt its energy portfolio to reduce the state’s reliance on fossil fuels. Hawaii has the nation’s highest electricity prices, with approximately 75% of the island’s electrical power coming from imported oil. Notably, the entire island chain of Hawaii has just 2,400 megawatts of generating capacity. Unlike mainland utilities, HEI is geographically isolated. Whereas electric utilities can typically purchase electricity on wholesale markets to meet fluctuations in demand, HEI can purchase power only from local sources and thus is extremely limited by on-island generating capacity.

HEI continues to be a confusing story for investors, as it derives about two thirds of consolidated earnings from an electric utility and about one third from a regional bank, American Savings Bank. A potentially improving Hawaii economy, driven in large part by returning tourists, should benefit both businesses, in our view. For NextEra, the utility acquisition provides a foothold in the state’s rapidly evolving clean and renewable energy transformation. Given that Hawaii has the highest utility costs nationwide, NextEra could use this revenue stream to finance a much-needed accelerated infrastructure build-out, which will likely include leveraging geothermal and other renewable resources. Currently, 20% of Hawaii Electric’s production is based on renewable energy; rooftop solar serves 11% of the utility’s customer base.

American Savings Bank is one of Hawaii’s largest full-service financial institutions, with over $5 billion in assets (the third largest bank in Hawaii by total deposits), and provides banking and insurance services to individual and business customers through 55 branch offices and an insurance agency subsidiary. For ASB, the primary challenge going forward is navigating the state of Hawaii’s unusual and diverse economy, which depends significantly on conditions in the U.S. economy and key international economies, especially Japan. Given the state’s high cost of imports, there is a relatively high cost of living, with inflation outpacing the national average by 1-2% on average since 2003. However, statewide unemployment was 3.2% as of May 2016, significantly below the national unemployment rate of 4.7% for the same period. ASB achieved ROE of 9.9% over the last 12 months, maintaining a fairly conservative risk profile. Year-to-date annualized loan growth was 5.9%, driven primarily by higher commercial real estate, home equity lines of credit, and residential loans.

In general, regional bank stocks have underperformed this year, with the S&P Regional Bank Select Industry Stock Index (SPSIRBK) having declined 7% year to date versus a 1% and 4% decline for the S&P 500 and NASDAQ over the same period—but valuations may begin to improve as many companies continue to enhance dividend yield and further de-risk balance sheets. The regional banking sector may also be poised for further industry consolidation as companies attempt to improve operational performance through scale.

Based on an analysis of projected revenue, assets, EBITDA, and comparable valuations, a pre-spin sum-of-the-parts estimate of $40 per share for pre-spin HEI can be derived. Post-spin, ASB Hawaii can be fairly valued at $8. With the pre-spin fair value estimate implying 16% potential upside to HEI’s current share price ($33.84 as of June 23, 2016), the pre-spin shares are recommended for purchase. That said, investors should consider the regulatory risk associated with the transaction. This analysis assumes that HEI and NextEra will be able to address the concerns of Hawaii’s governor and the PUC regarding the transaction. Post-merger, NEE can be fairly valued at $127, representing 3% potential upside to the shares’ current price. The lack of incremental value creation likely reflects the scrutiny surrounding NextEra’s future commitment to Hawaii’s renewable goals (state consumer advocates question any incremental customer savings), and in turn, regulatory risk associated with the transaction. As such, HEI shares appear to be the more attractive way to play the transactions.

APN News & Media is a diversified media company with assets located primarily in Australia and New Zealand. These include radio stations, print publications, and outdoor advertising media. APN has not been able to escape the massive disruption to the traditional media industry caused by digital and internet-related media properties. The company’s print publications have been struggling, and in certain markets its radio station assets have not been growing either.

On May 11, 2016, the company announced that it would be separating its Australian assets from the more problematic New Zealand operations. This continues a trend within the global media industry to cope with declining subscribers and viewership rates. On this basis, it is entirely logical that the company is pursuing this asset separation path. However, the APN transaction also appears to be based on a separation of geography: the company has had more success in the Australian market than in New Zealand. The spin-off will allow APN to focus on its core Australian audience, while the New Zealand business will continue to restructure and, potentially, arrest the recent decline in revenues and cash flow.

Following the spin-off, which was approved by shareholders on June 16, 2016, APN will be comprised of the Australian radio and outdoor advertising assets, which the company believes are more desirable. Interestingly, on June 21, 2016, the company announced that it had reached an agreement to sell its publishing business (ARM) to News Corp, which happens to be one of APN’s largest shareholders. If this is completed, APN will no longer be engaged in print media, and instead will focus entirely on its radio and outdoor advertising segments. The radio business is actually growing, recording revenues of AUD 221 million in 2015, a 44% increase over the AUD 153 million realized in 2013.

The New Zealand business, NZME, will own local publication, radio, and various digital media brands. NZME has struggled, having reported declining revenue and EBITDA in each of the last three years. This is entirely due to the company’s reliance on its publishing segment, which currently produces over 60% of the overall cash flow, and which has been in decline for the last several years.

The spin-off will be on a one-for-one basis, such that each APN share will be entitled to one NZME share. The company recently completed a rights (entitlement) offering of 343 million shares for net proceeds of AUD 175 million, which will be used to retire existing APN debt. Additionally, a one-for-seven share consolidation (effectively a reverse split) was recently approved by shareholders. Thus, prior to the spin-off, APN will have 196 million shares outstanding.

On a fair value basis, a wide range of outcomes is presented later in this report. Based on simple comparable-company methods such as enterprise value/revenue and EBITDA, it appears that the standalone APN is worth anywhere from AUD 1.55 to AUD 2.29 per share. On the other hand, NZME might be valued within a range of AUD 1.66 – AUD 2.28 per share. On a combined basis, the current fair value for APN seems to be AUD 3.21 – AUD 4.55 per share, relative to the pre-spin price of AUD 4.53.

It is interesting to note that most of the Australian media companies trade at roughly 11x forecasted earnings. The standalone APN is actually a growing business that likely will have considerable cash flow relative to its market capitalization. If the market values this company at 11x earnings, given the free cash flow as calculated later in this report, APN would trade at an effective free cash flow yield of just over 9%. It therefore could be attractive to certain yield-oriented investors comfortable with the risk associated with continued pressure on the media industry. While a similar yield analysis could be performed on NZME, at the current juncture the company’s cash flow is in decline, which would obviously invalidate future cash flow/yield assumptions.

It therefore seems that the prospective return from APN is limited. As there are no obvious margin expansion scenarios, with the current APN/NZME EBITDA margins at or above industry norm levels, it is rather difficult to imagine how the earnings of either company will be dramatically higher following the separation. Of course, should the market unduly discount the price of either following the spin-off, such mispricing surely would warrant further examination. However, at the moment, the company appears fairly valued such that no action is recommended at this time.

NCC is a Swedish construction and property development corporation operating in the Nordic and Baltic countries, Russia and Germany. On November 26, 2015, it announced that it had commenced preparation for the spin-off of its housing division, NCC Housing, in accordance with the Lex ASEA regulations—i.e., in a tax-free manner. The spin-off was completed on June 3, 2016, with shares of the spin entity, Bonava AB, distributed to shareholders on June 9.

NCC is controlled by private investment firm Nordstjernan AB, one of the holding companies of the Swedish billionaire Axson Johnson family. Nordstjernan has a 20.1% economic interest in both corporations, but, until recently, controlled 62% of the votes due to its ownership of series A shares that carry 10 votes each. To ensure the tax-free nature of the transaction, Nordstjernan converted almost half of its series A shares to series B ones, reducing its voting power to 49%.

NCC’s management and Board commenced the examination of the benefits of a spin-off in September 2015. The rationale for their decision to separate NCC Housing is that it will allow both companies to better capitalize on the opportunities identified in their respective fields of operations. But perhaps a better explanation lies in their distinct business models: the construction and civil engineering businesses can operated with little capital, have higher returns on equity, but are low margin. Homebuilding, on the other hand, requires a significant amount of capital to operate and has low returns for every dollar invested, thus typically requiring the use of leverage. Given these differences, the spin-off will allow each firm to implement an appropriate capital structure—with Bonava taking on significantly higher leverage and consequently freeing capital that can be used for further expansion at the parent company. Lastly, it should be noted that NCC Housing is a division that commenced operations just in 2008, and over the years became NCC’s most profitable segment—generating over 40% of operating income in 2015—despite not being part of NCC’s core, historical operations.

Bonava is a housing developer operating in the Nordic countries, Germany and St. Petersburg. It develops both single and multi-family properties and caters to both real estate investors and final consumers. As a homebuilder, Bonava is a capital intensive company with lower return on assets. However, its margins are well above those in the construction business. In order to fund its operations and increase its return on equity, Bonava will take substantially all of the net debt of pre-demerger NCC. Its SEK 4,490 million in net debt is 3.2x the company’s 2015 EBITDA.

The business has expanded its sales and operating income rapidly since 2013, benefitting from strong housing demand and materially higher housing prices. Operating income during that period has more than doubled. However, these very factors that have contributed to the company’s profit expansion pose its biggest challenges today. European countries, including Finland, are facing an economic slowdown, and so are oil producing nations such as Norway and Russia. Perhaps more importantly, housing prices have increased to potentially unsustainable levels in certain markets. Both Sweden and Norway have seen housing prices double since 2005. Therefore, despite Bonava’s strong track record of profit generation and growth, it should not command a premium over its homebuilding competitors. Based on peer enterprise value-to-EBITDA and price-to-earnings multiples, Bonava’s equity is valued between SEK 100 and SEK 112 per share.

With the completion of the spin-off, NCC is returning to its roots as a construction company. It comprises of three divisions: Industrial, which produces asphalt and aggregates, Construction and Civil Engineering, and Property Development, which focuses on commercial properties. The importance of Construction and Civil Engineering cannot be overstated. It is responsible for approximately 70% of NCC’s post spin-off pro forma operating income. It is also in that sector that NCC has a leading market share—likely number one or two—in the Nordic region.

Despite its strong market positioning, NCC’s pro forma sales have not expanded since 2013, while its operating margin has shrunk by 70 basis points. As this is a low margin business, the margin compression has resulted in a 20% decline in operating income during that period. The main contributors in this decline were a sharp drop in revenue and operating income from commercial property development in 2014 and a swing to an operating loss in Construction’s Norway arm as well as in the Industrial business in 2014. Excluding these items, the core of NCC’s construction operations remains healthy.

Similarly to Bonava, post spin-off NCC faces several headwinds, such as lower GDP growth in several of its markets and the likelihood of lower public spending in Norway, whose budget has taken a hit from lower oil revenue. It is indicative that 43% of the Construction’s segment revenue are tied to government spending, primarily in Sweden.

While construction companies are asset-light, they do have very low profit margins and thus a high likelihood to suffer losses when construction activity slows. Perhaps as a counter to that, NCC through the spin-off is transferring substantially all of its net debt to Bonava. As of December 31, 2015, NCC had, on a pro forma basis, only SEK 180 million in net debt and SEK 4,980 million in equity. Furthermore, the company will have substantial liquidity, with cash standing at SEK 3,780 million that can be used for acquisitions or simply as working capital that would allow the firm to aggressively bid for projects in new geographical areas. Based on peer enterprise value-to-EBITDA and price-to-earnings multiples, NCC’s shares following the spin-off are valued between SEK 187 and SEK 193.